June 6, 2019 by matray

Fitch Ratings has affirmed ProAssurance Corporation’s (PRA) subsidiaries Insurer Financial Strength (IFS) ratings at 'A' (Strong). Fitch has downgraded PRA's senior unsecured debt to 'BBB' from 'BBB+' and its Issuer Default Rating (IDR) to 'BBB+' from 'A-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of the release.

KEY RATING DRIVERS

The rating affirmation considers the company's very strong capital and profitability, low financial leverage, and favorable reserve experience. Partially offsetting these positives is the company's business profile.

Fitch's downgrade of the holding company ratings reflects a financial leverage and fixed-charge coverage ratio profile that is no longer consistent with narrow notching. In particular, narrow notching may be applied if a company maintains 15% or less financial leverage or has 12x or greater in fixed-charge coverage (FCC). As of YE 18, PRA had FLR of 16% and FCC of 5.5x respectively.

While financial leverage has increased, mainly from reductions in common equity from dividends and share repurchases, it was the decline in FCC below a 12x threshold that has led to the holding company ratings being downgraded. FCC declined, for the sixth consecutive year primarily due to the effect of lower prior year favorable reserve development on earnings.

Fitch views PRA's profitability as very strong but declining. The full year calendar year combined ratio for 2018 was 101.5%, up from the prior year's 95.4%. Calendar year combined ratios for the past several years have benefited from large favorable loss reserve development. Pre-tax operating income was $73 million for full year 2018 down 42% from the prior year and 71% from full year 2014.

PRA has a moderate business profile. Approximately 60% of overall premium relates to medical professional liability insurance (MPLI) a relatively volatile line of business. The MPLI market includes numerous monoline MPLI writers that have very strong capital positions and limited underwriting opportunities outside of MPLI, thus intensifying a soft market. The company does actively write workers' compensation but is exploring strategic alternatives for its Lloyd segment.

Overall, reserve adequacy is a positive to the rating. PRA is likely to continue to report significant but declining favorable prior period reserve development going forward. Fitch believes that current loss ratio estimates incorporate a reasonable but conservative view for future claims reserves.

RATING SENSITIVITIES

The following could lead to a downgrade of all ratings:

--An increase in financial leverage above 28% or decline in operating earnings-based coverage below 6x;

--Material adverse reserve development;

--An increase in the company's GAAP operating leverage of 1.0x or higher;

--A Prism capital model score below 'Strong' (currently 'Very Strong').

The following could lead to an upgrade:

--An improvement in business profile while maintaining profitability.